Are Investors Sick and Tired of Buybacks?

Over the last few years of bull market excess, companies have been spending less on capital, and more on buying back stock. But Justin Lahart reports that non-financial companies are slowing down their stock buybacks and doing more capital spending compared to their cash flows.

But the data also suggest a shift is underway. In the fourth quarter, nonfinancial companies bought back a net $323 billion in equities, at a seasonally adjusted annual rate, half as much as in the previous quarter and the lowest amount since the second quarter of 2014.

And unlike the third quarter, companies’ capital spending surpassed their cash flows, which is a return to normal. Companies usually borrow to spend, betting the payoff from the investments more than pay off the debt.

It is still early going, but there may be a real change here. Share repurchases are hard to justify when stocks are expensive. Rising wages make buying labor-saving equipment more attractive. And if President Donald Trump gets the the tax-cut and spending legislation he wants, the economy could get a bump that companies will want to be ready for.

Investors are now betting on companies with a growth strategy. Here’s guessing companies will happily oblige.

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.